The 'Small' Numbers on the Student Loan Interest Rate Hike

Yes, the interest rate on some federal student loans is set to double this July from 3.4 percent to 6.8 percent unless Congress acts. And every news story and sound bite on the issue tells us the big numbers at stake. Seven million borrowers will be affected… The rate hike will cost borrowers an additional $1,000… Outstanding student loans total $1 trillion… Maintaining the lower rate will cost taxpayers $6 billion a year. But now consider the small numbers at stake, the numbers that no one is talking about.

One year. That’s the number of years for which students have been able to take out loans at the 3.4 percent interest rate. Under current law, only Subsidized Stafford loans issued to undergraduate students for the 2011-12 school year qualify for the 3.4 percent rate. All loans issued earlier carry higher rates. It is also important to keep in mind that previously-issued loans will not be subject to the rate hike. The interest rate changes apply only to newly-issued loans.

One (more) year. That’s the number of years that borrowers would be able to take out Subsidized Stafford loans under President Obama’s proposal. Loans issued in the following school year will again carry the 6.8 percent interest rate. Republican presidential candidate Mitt Romney supports the one-year extension, too.

12 percent. That is the share of dependent undergraduate students that will take out Subsidized Stafford loans who come from families earning incomes of $100,000 or higher. Eligibility rules for Subsidized Stafford loans take the “cost of attendance” into account, so students from high-income families attending the most expensive institutions of higher education can qualify for the lower rate. Meanwhile, students from families with lower incomes attending less expensive schools do not qualify for the 3.4 percent rate; they must pay the 6.8 percent rate.

One-third. That’s the share of all newly-issued federal student loans that qualify for the 3.4 percent rate under current law and under the one-year extension proposed by the president. The loans are available only to undergraduate students who qualify for a Subsidized Stafford loan by meeting a family income and ‘cost of attendance’ test, a subset of borrowers who will account for one-third of all federal student loans next year. The remaining 66 percent of loans will be made to all other undergraduate and graduate borrowers through Unsubsidized Stafford loans at the 6.8 percent rate, and parents of undergraduates or graduate students who exhaust their Stafford loan eligibility borrowing through the PLUS loan program at a 7.9 percent interest rate.

3 percent. That is the approximate share of the $1 trillion in outstanding student debt that will carry the 3.4 percent interest rate extension this year. The lower rate applies only to newly-issued Subsidized Stafford loans to undergraduates, and therefore does not affect rates on the $1 trillion in outstanding loans. Newly-issued Subsidized Stafford loans to undergraduates will total about $30 billion this year.

$5,500. That is the maximum amount that third- and fourth-year students can borrow at the 3.4 percent interest rate under current law and under the proposed one-year extension of the policy.

$9. The amount a borrower will save each month with a 3.4 percent rate compared to the 6.8 percent rate, assuming he borrows the $5,550 maximum allowable amount as a third- or fourth-year student.

$3,500. The maximum a first-year student can borrow at the 3.4 percent interest rate under current law and under the proposed one-year extension of the policy.

$0. How much lower a first-year student’s monthly payment will be at the 3.4 percent compared to the 6.8 percent rate, assuming he borrows the maximum amount. Borrowers must make monthly payments of at least $50 in repaying federal student loans. The first-year borrowing limit of $3,500 is low enough that under either interest rate, the minimum monthly payment is $50. To be sure, a borrower will make 79 monthly payments of $50 instead of 90 monthly payments of that amount if the loan carries the 3.4 percent interest rate.

These ‘small numbers’ help illustrate that the stakes aren’t as big as many – including the president – claim they are with respect to extending the 3.4 percent interest rate on some student loans for one more year. Policymakers in Washington would do much better to focus their time and attention on designing a permanent solution to the $7 billion funding cliff the Pell Grant program faces in 2014 and developing student loan interest rates that are more than arbitrary numbers.

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